The Actuarial Approach--Better Than The 4% Rule, Simpler Than Monte Carlo Modeling and More Effective Than Either

Looking to keep your spending on track and consistent with your spending goals in retirement? Forget the 4% Rule and complicated Monte Carlo simulations. Use the same basic approach/process that actuaries use for Social Security and pension plans. 

The Actuarial Approach involves:

1. Periodically (we recommend annually) comparing the present value of your assets with the present value of your spending liabilities to determine your Funded Status.
2. Taking appropriate actions when your Funded Status falls outside reasonable guardrails.

That’s it! And you can use one of our free Actuarial Financial Planners to perform the present value calculations. As discussed in our previous post, this process does involve annually entering your granular spending budget items and your sources of income as well as expected future increase rates for these items. But, we believe the effort you put into this annual process will be worth it.

Better Planning Starts with Granular Budgeting

Thanks to Rivan Stinson for teeing up the Actuarial Approach in Stinson’s recent Washington Post article titled, “Retiring soon? Plot a detailed budget first before tapping your 401(k).” In her article, Stinson writes,

“Once you make this granular budget, it’s time to crunch the numbers on how much your savings and investments, along with Social Security and a pension (if you have one), would cover.”

Creating a granular budget and comparing the present value of expected spending under the budget with the present value of household assets (including future payments from Social Security, annuities, pensions or other sources of income) to determine the household Funded Status are essential steps in the Actuarial Approach Recommended financial planning process.

How Bad is Social Security’s Financial Condition?

This post is a follow-up to our post of October 14, 2024 entitled, “Social Security Financing---When You’re in a Hole, Stop Digging.” In this post, we will look at the retirement plan of a hypothetical couple with approximately the same underfunded status as Social Security. We employ this analogy to try to give readers a better sense of the system’s current financial predicament and the need for sooner, rather than later, action to address it.